Navistar, Ford chasm narrows

Navistar International Corp. and Ford Motor Co. are working harder to repair their relationship after Navistar failed to strike a truck-building deal with General Motors Corp.

Executives with Navistar and Ford have had more-frequent discussions in recent weeks, aiming to settle lawsuits the companies filed against each other last year, according to people with knowledge of the situation. Details of those discussions or whether an agreement is close aren't yet known.

Mending fences with Ford has taken on greater urgency for Navistar after the Warrenville-based company's agreement to buy GM's medium-duty truck business fell through last month. Navistar had counted on the GM business to generate additional revenue and boost production volume at underutilized plants as truck sales slump. That would have helped offset the more than $2 billion Navistar stands to lose if Ford walks away.

"It makes it more important to get along with Ford now that you're not going to have GM," says J. B. Groh, an analyst in Oregon for D. A. Davidson & Co.

Since 2007, Navistar and Ford have been at odds over diesel engines Navistar supplies for Ford pickup trucks. In the lawsuits, filed in Michigan, the two companies accused each other of violating the terms of the engine contract, which expires in 2012. Navistar also has accused Ford of pirating a Navistar engine design. Early this year, a judge ordered the two sides to mediation, but the talks went nowhere.

The dispute also threatens the companies' joint venture in Mexico, which produces Ford-branded commercial trucks, an arrangement set to expire at the end of 2009.

Efforts to find an alternative to Ford stalled in August when Navistar, citing "significant marketplace and economic changes," couldn't reach a deal with Detroit-based GM. Navistar had planned to build the GM trucks at its assembly plant in Springfield, Ohio. Terms of the proposed deal hadn't been disclosed.

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A Navistar spokesman says the company isn't giving up on striking a deal with GM again and declines to comment on any settlement talks with Ford.

CEO Daniel Ustian, speaking to shareholders at the company's annual meeting last week, said, "Hopefully, our two companies will get together and solve (the lawsuits), and we'll both be better off."

A spokeswoman for Dearborn, Mich.-based Ford says the company has "been talking with Navistar all along. It's what the court has preferred." Ford, she adds, has "been preparing for trial."

Navistar's business with Ford has declined as the automaker struggles with a deep industry downturn. Sales to Ford accounted for 9% of Navistar's revenue in the first three quarters of fiscal 2008, down from 14% a year earlier.

In a filing last week with the U.S. Securities and Exchange Commission, Navistar warned that "a prolonged reduction in Ford's demand for our engines or the early termination or non-renewal of our agreement with Ford could have a material impact on our financial position, results of operations, or cash flows."

Ford, given tumbling sales of pickup trucks and sport-utility vehicles, has more incentive to make up with Navistar and probably doesn't want to spend money developing its own diesel engine at a time when business is weak, industry analysts say. That leaves Navistar in a position to remain Ford's sole supplier of the engines.

"The business case for Ford to make a lot of investment in those diesel engines is greatly diminished, so that would be a positive for Navistar," says Kirk Ludke, an analyst in Connecticut for CRT Capital Holdings LLC.